Stuck In A Debt Trap? 5 Golden Rules You Should Follow While Taking Loan

No matter how much money you earn, there are times when you might need to borrow. A loan that helps meet important needs, like a home or education loan, is considered good. But some people borrow more than they can repay, which puts them in a debt trap.

To stay safe from such a situation, it's important to follow a few basic rules. These rules are useful no matter what the interest rate is. Here are five tips suggested by Hemant Beniwal, Certified Planner & Director, Ark Primary Advisor, that every borrower should remember when taking a new loan.

1. EMI Should Be Less Than 50% Of Your Net Income:

Always borrow an amount you can repay comfortably. Ideally, your loan EMIs should not be more than 10% of your net monthly income, and for car loans, not more than 15%. If you are applying for a home loan, make sure its EMI is below 40% of your take-home salary. If you have more than one loan, all EMIs combined should be under 50% of your monthly income. In case of job loss or salary cut, people with high EMIs will face major trouble.

2. Choose A Short Loan Period:

Most people pick longer loan terms to lower their EMIs and save on taxes. But with longer tenure, you end up paying more interest. If you can afford it, pick the shortest tenure possible. For long-term home loans, try to increase your EMI every year as your income grows. That way, you can repay faster. A 10-year loan can lead to 57% interest costs, but for 20 years, it goes up to 128%.

3. Pay EMIs On Time And Regularly:

Paying your EMIs on time helps you avoid extra charges and boosts your credit score. Being regular with payments makes it easier to get future loans. Missing even one EMI can lead to penalty charges and extra interest on the unpaid amount.

4. Get Insurance For Large Loans:

If you take a big loan, like a home loan, buy a term insurance plan too. In case something happens to you, the insurance company will give the money to your nominee, and that amount can be used to repay the loan. This keeps your family safe from financial pressure.

5. Don't Borrow To Invest:

Some people take loans to invest in things like the stock market, hoping for higher returns. With interest rates going down, many feel tempted to borrow money even if they don't need it. But since the stock market is risky, you might lose all your money. It's not wise to borrow just to invest.

6. Create an Emergency Fund:

An emergency fund is a savings cushion that helps you stay financially stable during tough times like job loss, illness, or unexpected expenses. Setting aside at least 6 months to 1-year worth of living costs, including your loan EMIs, can keep you from missing payments and falling into a debt trap says Hemant Beniwal of Ark Primary advisors.

This fund acts as a safety net, allowing you to continue repaying your loans on time without having to take on more debt or dip into investments meant for long-term goals, he added further.